Argus Cites Disappointing Organic Growth In Procter & Gamble Downgrade

Procter & Gamble Co PG reported fiscal third-quarter earnings Thursday that exceeded the Street's expectations but also reaffirmed disappointing organic growth rates, according to Argus.

The Analyst

Argus' John Staszak downgraded Procter & Gamble's stock rating from Buy to Hold.

The Thesis

Procter & Gamble has overseen multiple transactions over the years to help reinvigorate organic growth, Staszak said in the Friday downgrade note. (See the analyst's track record here.) 

The company pledged in 2014 to divest or sell more than half its brands, the analyst said. Notable transactions have included the sale of its beauty business, the Duracell brand, the Hipoglos business and others. 

Procter & Gamble's organic growth hasn't sufficiently improved to satisfy expectations, Staszak said. The company not only continues to lose market share in multiple categories, but the margin improvement seen in recent years has slowed, he said. 

Procter & Gamble guided its fiscal 2018 organic revenue growth to come in at the low end of its prior 2-3-percent guidance range, Staszak said. The company faces ongoing risks from rising commodity costs, which can cut into margins when combined with lower prices in stores, according to Argus.

Notable investments in new products like Tide PODS could also hurt Procter & Gamble's financials if the items fail to live up to consumer expectations, Staszak said. 

Based on the multiple challenges over the past year and the high level of competition, the stock is "fairly valued" at its current 17.7x multiple on the analyst's 2018 EPS estimate, in Argu's view. If Procter & Gamble is able to accelerate its organic growth, a bullish stance on the stock would then be justified, Staszak said. 

Price Action

Shares of Procter & Gamble were trading lower by nearly 0.2 percent at $74.81 at the time of publication Friday. 

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Photo courtesy of Procter & Gamble.